Launching the Game of Trades Model Portfolio: A Collection of Our Best Bets

Here’s the video version of the article:


  • Today we’re launching the Game of Trades Model Portfolio, the product of our strategic and tactical research. Our investment process is comprised of those three components.
  • The portfolio represents a collection of our best bets. It maximizes the risk-reward of our highest-conviction ideas derived from our research.
  • Our biggest position is on equities, with consumer discretionary, tech and transportation stocks making up 50% of the portfolio. The bet represents peaking inflation and resilient earnings.
  • Bitcoin comprises roughly 5% of the portfolio. We believe the cryptocurrency will benefit from rising stocks and a weakening dollar; a bet that the Fed will ease off.
  • About 30% of the portfolio is comprised of Treasury bonds. They’re an attractively-priced hedge to our big equity exposure. They can protect us if the economy weakens more than expected.
  • We have a relatively-small short position on oil, believing there’s still more downside. The big decline in prices of late, however, has cut some of that runway.

How the Model Portfolio Fits Within Our Investment Process

Over the last several months we’ve revamped our efforts to boost our research capabilities. That led us to establish a two-fold investment process that complement each other: strategic and tactical. Our Model Portfolio, the expression of our research efforts, adds a third component as shown in the diagram below.

The strategic component formulates our investment thesis, that has an investment horizon of six-to-12 months. The approach is top-down, contextualizing the macroeconomic backdrop with historical analysis. To do that we leverage our extensive analytical capabilities. We seek to understand the key dynamics operating across markets and exploit big dislocations.

The tactical component leverages our expertise in technical analysis to highlight attractive setups and structures that best express the views derived from our strategic research. We look for opportunities that maximize the risk-reward.

The model portfolio synthetizes our strategic and tactical research into a simple and transparent vehicle that expresses our bets. The objective of the portfolio is to maximize the risk-reward across the various opportunities derived from our research. The chart below depicts the portfolio’s asset allocation as of today.

In the sections that follow we’ll delve into the portfolio construction process and the underlying bets.

Portfolio Construction: Maximizing the Risk-Reward

Our Model Portfolio seeks to maximize the risk-reward ratio of the collection of ideas derived from our research. To do that we estimate expected returns (i.e., reward) and expected volatilities (i.e., risk) for each asset class, using those estimates to compute risk-reward ratios for each of them.

The expected returns (i.e., reward) are derived from our strategic research and are based on six-to-12 month investment horizons. The process for deriving expected returns varies by asset class. Some may be derived from a model that weighs in important dynamics dominating the return structure of a particular asset class. In the case of Bitcoin, for example, that involves forecasts for the S&P 500 and the dollar. In the case of the S&P 500, the expected return is a function of our forecasts for earnings growth and P/E valuation multiples.

Importantly, the expected returns are vetted by those derived from price targets sourced from our tactical research. We want to see consistency between the strategic and tactical targets, as that improves the accuracy of the forecasts. The expected volatilities (i.e., risk) comprise an average between historical volatilities, and those implied from the options market.[1]

We then input the expected returns and volatilities through a portfolio optimizer. The optimizer is meant to maximize the risk-reward of the portfolio, or in finance parlance, the Sharpe ratio (i.e., expected return less the risk-free rate, all of it divided by the volatility).[2]

Lastly, we apply constraints to the portfolio as a measure of risk management. For example, we may limit the allocation of any particular position, particularly to those with inherently high volatility, regardless of how attractive we find the opportunity. That would help prevent any single position from unduly impacting the overall performance of the portfolio.

Asset Allocation: Equities Represent Our Biggest Bet

The model portfolio is heavily-weighted toward equities, that we see as the best expression to capitalize on the incoming disinflation regime and resilient earnings growth. Our target for the S&P 500 over the next 6-12 months is $5,200. We’ll use that index as our performance benchmark.

In this section we’ll summarize the investment thesis for the eight asset classes featured in the model portfolio. The thesis for each is derived from our research.

Consumer Discretionary Stocks (Long, XLY)

In prior research we found similarities between today’s consumer and that in the years following WWII, when there was also a lot of pent-up demand and excess savings. Today the latter is about $2.5 trillion, about 16% of expected consumer spending in 2022 and 2023, a big number by the standards of history as shown below.

Moreover, spending is being underpinned by a strong labor market. We believe the decline in real goods spending so far this year has been driven by rebalancing toward services, not a sign of underlying weakness. All of this is supportive of a constructive picture for earnings.

In prior work we found consumer discretionary stocks won big in disinflation regimes. That makes sense because they’re typically sensitive to interest rates, and hence an easing Fed can be a tailwind. Consumer discretionary stocks have outperformed the S&P 500 by around 10 percentage points since we published our work on the sector.

Information Technology Stocks (Long, XLK)

The aggressive rise in interest rates this year has been a big headwind for technology stocks given their high-duration profile (i.e., secular cash flow producers). That said, our work on the technology sector finds the stocks attractive given their lower valuations and earnings advantage. We think they represent a unique opportunity to buy high profit margin businesses at a big discount.

The stocks are valued much lower than the Nifty Fifty cohort of yesteryear, that succumbed to very high valuations going into the 1970s inflation regime. Moreover, today’s tech stocks are much less risky than their 1990s predecessors, as their fundamentals are a lot more stable.

We’ve also found technology stocks among the leading sectors coming out of market drawdowns. We expect them to outperform after interest rates peak.

Transportation Stocks (Long, IYT)

In our prior work on the consumer, we highlighted the constructive case for transportation stocks. They stand to benefit in a disinflationary regime that see oil prices subside quickly, boosting discretionary spending from the consumer toward travel (i.e., airlines) and goods (i.e., trucking logistics, rails).

Falling oil prices would also bring down fuel costs for these oil-intensive industries, boosting profit margins. In fact, transportation stocks were the best-performing sector across various disinflation episodes we studied going back to the 1940s.

Bitcoin (Long, BTC)

Our work on Bitcoin reveals that it’s a levered bet on the S&P 500 (positively-correlated) and the dollar (negatively-correlated). As we mentioned earlier, we have a constructive view on stocks based on our expectations that interest rates will fall and earnings growth will be better than expected. We have a negative bias on the dollar related to our view that the Fed’s runway for more aggressiveness is now limited after reaching a neutral stance. As a result, we believe there’s upside in the cryptocurrency.

However, our research also points out that Bitcoin tends to underperform stocks following downturns, as investors look for confirmation that optimism in equities comes back. For instance, we’ve found that the best returns to Bitcoin came during low equity volatility regimes. While we seek out to anticipate the rebounds in stocks, as a big part of the returns accrue quickly, that’s less the case with Bitcoin. With the latter, we need the green light before increasing the bet.

Moreover, the dollar could continue rising if global uncertainty worsens from here, as that’s a critical risk factor in driving the greenback’s strength.

Crude Oil (Short, OIL)

Our disinflation thesis was highlighted in research published in June, with falling oil prices a large component of it. Back then we took note of the 130% rise in gasoline prices since the bottom in inflation seen in May 2020. We saw that as overextended, limiting the runway for further price gains. That’s because gasoline prices can be self-limiting, as rising costs can slow down demand.

We also highlighted that the jump in gasoline prices associated with the Ukraine/Russia war far exceeded prior run-ups that also featured a major oil supplier as a combatant. As a result, further upside in prices would need to see another oil shock in the making. Since then, weakening demand and a fading supply shock have pulled oil prices down, acting as a drag on inflation. The precipitous decline in oil prices of late has reduced the downside risk of oil for shorts, and therefore the risk-reward is now less favorable.

Treasury Bonds (Long, TLT)

Our sizeable allocation to stocks exposes us to weaker-than-expected economic growth that could undermine earnings. That view was detailed in prior research that highlighted the case for Treasury bonds as cheap portfolio insurance, following their large decline this year resulting from the Fed’s tightness. As inflation recedes from here, we expect interest rates to decline as the bond market anticipates the Fed changing its stance, representing a tailwind for bonds.

Our work on quantitative tightening didn’t find a clear relationship between a contracting balance sheet and bond returns, hence we don’t see it as a big threat.

Our allocation to bonds is based on its hedging profile, and it’s not a tactical bet. Therefore, its weight in our portfolio is a function of the current level of the yield curve. When the yield curve is inverted as much as today, bonds tend to do well in the next year.

Cash (BIL)

Our initial cash allocation is set at 10%. That’s high relative to our long-run target of 5%. A higher initial allocation at launch gives us flexibility to fund upcoming opportunities, or add to current ones, without having to reduce existing positions.

Conclusion: Next Steps

Our model portfolio reflects our highest conviction ideas backed up by our ongoing research, and it’s shown in the table below. Our biggest bet today is on stocks, that we see as leading beneficiaries as inflation recedes from here, interest rates fall and earnings prove resilient. We don’t foresee a deep recession at this point, but are hedging our equity exposure through Treasury bonds.

We’ll be updating our portfolio as our research evolves, adding new ideas and removing those that lose attractiveness. We’ll be sure to communicate those changes and provide our reasoning. We’ll also rebalance the portfolio over time to re-calibrate our exposures.

We’ve put a lot of effort into constructing our model portfolio and are very excited to launch it. We believe it’ll be a big value-add to our members in helping to inform their decision-making.

Here is today’s YouTube video: For the 5th time in Stock Market History… the SP500 Will See a MASSIVE Recovery.



[1] The idea is to take into account what the market’s expectations for risk going forward are, while also weighing in volatility’s mean-revering property. We believe that’s a sensible approach because high implied volatilities can unfairly penalize estimates of risk-reward, particularly for high-conviction ideas.

[2] The optimizer uses an algorithm that iteratively varies the weights of the various asset classes in the portfolio to find the combination offering the highest expected return per unit of risk. The optimizer also needs a correlation matrix in order to have a sense for how each asset co-moves with the other, assessing diversification benefits. We use a weighted-average of both short-and long-term correlations.

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  1. (2) 2
    SVO says:

    Looks good! … Where do we find the portfolio on the website?

    1. (6) 6
      GOT says:

      @SVO Thank you for the feedback. We’ll be integrating the model portfolio with the launch of our new website in Q4. Stay tuned for that.

  2. (1) 1
    Growgeek says:

    What are some tickers for short oil? Is xle also short?

    1. (0) 0
      GOT says:

      @SVO The ticker for expressing our views on oil is through shorting the ticker OIL. You can find more information about this ETN in the link below. We prefer this ETN because it avoids congestion in the front end of the oil curve and minimizes the negative roll yield in contango markets.;instrumentId=103217

  3. (0) 0
    Samonita Kayden says:

    Based on your expected return for tech which is around 50%, as well as your target price of 5200 for SPX (about 40% from current levels), the outperformance of tech relative to SPX would be a mere 7%, and NDX would just be slightly (3%) above its previous all-time high. This is in stark contrast to 9% in the case of SPX. Does it mean that GOT expects tech outperformance in the coming bull run to be not as strong as other times in history, for example, from March 2020 to November 2021 ? Please correct me if I have misunderstood anything.

  4. (0) 0
    GOT says:

    @Samonita Kayden Thank you for the question. We expect XLK (tech), XLY (cons. discretionary) and IYT (transportation) to outperform the S&P 500 in the recovery. Regarding the specific percentage moves for each, that’s based on our modeling work. Tech’s outperformance following the pandemic was driven by demand for Covid-related digitalization and therefore we can’t expect the same outcome this time around. So it is a bit more conservative than that particular episode.

  5. (1) 1
    Tillson vom Dach says:

    How is the symbol for OIL? Brent and WTI is above $80. I couldn’t find it for $27.96, maybe you can help out? Thank you.

  6. (0) 0
    GOT says:

    The ticker is OIL. We prefer that ticker to express our views on oil through shorting that vehicle. You can find more information about this ETN in the link below. We prefer this ETN because it avoids congestion in the front end of the oil curve and minimizes the negative roll yield in contango markets.;instrumentId=103217

  7. (1) 1
    ggb58 says:

    I like your conviction and now we can get direct feedback on this. Great update to the site. Wow. The level of put buying has been astronomical. What a better time than to buy good quality stocks , which I did the last few weeks.

    I appreciate all the data you have provided and it does help investors rationalize. Especially in light of the fact that every social media video and comment is negative.

    “An intelligent investor gets satisfaction from the thought that his operations are exactly opposite to those of the crowd.” – Benjamin Graham, Economist.

    Way too many in the crowd for me. Nothing is for sure but when you weigh the risk vs reward you make your money on the buy. No one knows all the answers so we can only analyze that core of financial investing risk vs reward.

    1. (0) 0
      GOT says:

      @ggb58 Excellent words. We’re glad you enjoy the work. Thank you for the support.

  8. (1) 1
    Mick says:

    If you expect the dxy to go down naturally oil will go up is this only a short term outcome and over the longer term oil demand will naturally make it go lower?

    1. (0) 0
      GOT says:

      @Mick Thank you for the question. You’re spot on that a weaker dollar would put upside pressure on oil and other commodities. However, throughout most of 2021 and the first few months of 2022 oil and the dollar moved together higher. We think that has to do the economic reopening and the war premium from the Russian invasion of Ukraine. As those factors subside it should overwhelm a weakening dollar. Modeling the moves in oil with those of the dollar shows a big premium of oil prices relative to fair value.

  9. (1) 1
    Hutch0321 says:

    Thank you for the thoughtful analysis. I have been collecting long Uranium miner calls. I heard uranium described as having a lottery ticket with the odds in your favor.
    The risk reward seems reasonable.

  10. (1) 1
    Simon Davies says:

    Congratulations on creating this portfolio. I joined a few days ago, and it was the one thing that I felt was missing from the website. So I am glad to see something that pulls together all the different reports that are written into one snapshot. I hope there will be a daily updated total portfolio value report so I do not have to calculate it myself.

  11. (0) 0
    The Oracle says:

    I love the idea of a model portfolio. Excellent. One small complaint. If you put out a model portfolio on Sep 28, but then use Sep 27 prices on products that went much higher over a day that is not really kosher. For example, on the day you posted your recommendations the TLT was about 103.5. But you use the Sep 27th price of 100.95 for TLT, the closing price the day BEFORE you posted your recommendations. IMO, if you post a model portfolio to your subscribers on the 28th, then prices start on the 28th. Not on the 27th.

    1. (0) 0
      GOT says:

      We appreciate the feedback. Our investment horizon is 6-12 months, so we’re not particularly looking to time the market perfectly. The objective of the portfolio is to summarize the product of our strategic and tactical research and provide transparency and visibility as to where our convictions lie.

  12. (0) 0
    Mick says:

    Thanks for the response just another question if outlook and demand tail for oil is the theory as long as the recession is held off the stock market will go higher as inflation will lower and profits will be higher due to falling oil prices?

  13. (0) 0
    GOT says:

    Falling inflation will bring less pressure for the Fed to keep its aggressive stance in the face of slower growth, and hence the bond market should reflect that via falling interest rates. That should bring valuations up for stocks. On the earnings front, we believe earnings will be higher in a year’s time compared to what analysts are forecasting because earnings booms don’t die quickly, and hence that implies a higher level for the S&P 500.

    1. (1) 1
      Hutch0321 says:

      The turn around story is building momentum. I’d expect some kind of consolation or one last flush out but it’s no time to panic from these positions.

  14. (1) 1
    Craig Mankiewicz says:

    If you’re trading in an IRA, the ETF to short oil is SCO.

  15. (0) 0
    The Oracle says:

    Looks like a modified 60/40 portfolio 60% stocks and 40% bonds with a short oil hedge. The stock portion is basically picking a few segments you feel are going to outperform the S&P over the next 6-12 months. I do think you are more right than wrong on starting to add back bonds. The probability is we are approaching peak bond yields IF inflation can come down. If bond yields roll over the TLT investment should do well. Unfortunately inflation numbers came in high again for August despite the sell off in oil and gas — again oil gas prices are NOT a leading indicator for inflation and once again that has been factually demonstrated despite your conviction that is the case. Watch food and rents instead, which may be lagging but are more significant inputs to inflation. Bonds are acting well in the face of that bad inflation report, but yields went up significantly prior to the reading so they were due for a consolidation or pull back. I do think in general one and two year bond yields move up slightly toward 4.5% on short term rates especially if we see the FED do another .75 at it\’s next meeting and provide more hawkish talk. The longer yields, 10 = 3.75% and 20 at around 4% today, might come down sooner based on longer term lower inflation expectations even if short term rates continue higher for a short time. In any case we are approaching or are at yields where it is getting safer to hold bonds again and make them a part of the portfolio which has not been the case year to date.

  16. (0) 0
    Gold Finger says:

    Really nice work @GOT!

    Love the accompanying video.

    Will there be different model portfolios depending on membership?
    When looking at GOT memberships this feels like a Pro+ and Trading Room Pro Portfolio.
    Pro memberships would exclude the crypto part of this portfolio whereas Digital Assets memberships only would have crypto currencies.
    Will this be accurate?

  17. (0) 0
    eoj says:

    Well this certainly generated a lot of comments. Well done! No stops? I know William O’Neil had an 8% rule. Is there a period in which you plan on rebalancing or is that on a case-by-case basis?

  18. (0) 0
    hatoori86 says:


    Great research and awesome to see how it ties all ends together. Thanks you very much. I have a few questions. I hope you have some time to answer them at some point:

    Regarding earnings of the S&P sectors that you have mentioned, especially tech: Aren’t the companies pretty depended on revenues coming from Europe as well? Especially seeing the ongoing weakness in the gdp of European countries, as well as their fiscal and energy challenges, aren’t US corporations gonna be heavily affected by that? I wonder if the assumed recovery in the spending of the US consumer will be enough to stabilize earning in the way described.

    Regarding the bitcoin predictions. I understand the correlation with the equity market, but how is the crypto market and bitcoin supposed to grow in an environment of ongoing monetary tightening? QE and stimulus by policy makers around the world lead to the situation where enough fiat could flow into the crypto market. Where should the money come from in your predictions?

    Regarding XLY predictions. I had a deeper look into the sector and saw that XLY ETFs have 40% holdings in Tesla & Amazon. I wonder if the historic examples are valid considering that the sector right now consists of heavy exposure in these growth stocks that are relying on well run global business as well.

  19. (0) 0
    hatoori86 says:

    Another question: Why are you actually selecting 20yrs bond and not a 10yrs bond?

  20. (0) 0

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